The Holy Grail looks as far away as ever

The problems with the East Coast franchise go right to the heart of the franchising model. I predict more trouble ahead

LNER: Starting June 23, 2018

There was a pithy letter in The Guardian this week from one Bob Ward in Leeds. He wrote: “I’m concerned that the trains on the east coast route may soon have so many coats of paint they may not fit in the tunnels.” Ouch.

The history of the line since privatisation does not make happy reading for the Tories. Three private sector franchisees who have thrown in the towel, and one period of state control, widely seen as a success.

First there was GNER, part of James Sherwood’s Sea Containers group, who tried the added value approach but couldn’t make it work. Then there was a dismal two years from National Express who promised more cash but over-reached themselves, their tenure ending in ignominy. Then after six confident years of East Coast, the Department for Transport arm’s-length company, came Stagecoach, with a Virgin coat of paint on top. Now barely three years into an agreement due to run to 2023, that too has collapsed.

In November we were told the franchise would end three years early in 2020. Now in what looks like panic, we are told it is ending on June 23.

This latest failure is particularly embarrassing for the Tories. It was Patrick McLoughlin who, as transport secretary, was determined to ensure the line was back in private hands before the 2015 general election, just in case Labour won.

This is despite the fact that East Coast was running well and turning in a healthy profit for the taxpayer, and it was the West Coast franchise which at the time needed attention.

As the Lib Dem rail minister, I did not object to the concept of returning the line to a private company, but it was in my view completely the wrong operational decision at that point and one made for the wrong reasons.

As the Lib Dem rail minister, I did not object to the concept of returning the line to a private company, but it was in my view completely the wrong operational decision at that point and one made for the wrong reasons.

This was really the only major flashpoint the two of us had. For the record, I liked working with Patrick, who I thought was, by and large, a good transport secretary. We worked in harmony across the coalition and he was generous in his dealings with me, even publicly presenting me with a one-off award for an Outstanding Contribution to Transport. Not many Tories would have done that.

So now we have Chris Grayling announcing that the line would henceforth be run by “the operator of last resort”, that is to say the DfT. For someone from the right of the Tory party, that could not be a more accurate description. The words teeth and gritted come to mind.

The line will henceforth be called the London and North Eastern Railway, a name the transport secretary told the Commons was “iconic”. I imagine he was unaware that in the pre-British Rail era, LNER informally stood for Late and Never Early Railway.

So why has yet another private sector franchisee on the East Coast line fallen over? The worrying news for the government is that it is not just an East Coast problem. It is one
that goes to the heart of the franchising model. It just happens to have manifested itself here more than anywhere else on the network.

The theory is that private sector competition will generate a higher income stream (or a lower subsidy) for the taxpayer than would be the case were it run by the state. That theory has worked in that companies have put in higher and higher bids to win franchises.

But those high bids have often been unrealistic, assuming sometimes heroic levels of growth in terms of passenger numbers and spend, growth that has simply not materialised.

The DfT has not really wanted to rule out bids which it may privately have regarded as unrealistic. That would be to intervene in the competitive process, and anyway, the lure of money has been too great.

Now, of course, we are seeing at best a stagnation in terms of passenger numbers, or in many areas a fall. With a high bid and a tight margin, that can lead to a calamitous result.

In the case of Stagecoach/Virgin, they have a fair point that infrastructure and rolling stock improvements, outside their control, have been delayed, but that seems to me to be a mitigating factor, not the main reason for the financial failure.

I am not confident that passenger numbers across the network are going to pick up in the near future. In the immediate term, we have the dampening effect of Brexit which is already significantly affecting the country’s economic performance, particularly in comparison with other EU states. In the longer term, we have the move towards home working. And all underpinned by the nonsensical freezing of fuel duty for motorists for eight years now, during which time oil prices have been falling and an increase in duty would have been relatively painless. Instead the Treasury has unnecessarily lost income and in effect encouraged private car travel over rail, exactly the opposite of what a sensible economic, environmental and social policy should aim to achieve.

So I predict, with no joy, that the East Coast franchise is not the only one that is coming down the track towards the buffers.

So I predict, with no joy, that the East Coast franchise is not the only one that is coming down the track towards the buffers.

The DfT gleefully accepted a bid from FirstGroup for the TransPennine franchise that would bring in a contribution of £313m over seven years, way in excess of other bidders. The third highest bid wanted a subsidy over the same period of £410m, a difference of £723m, or over £100m a year, on a relatively small franchise.

The South Western franchise, also won by First, assumed just a year ago annual passenger increases of 7%. The first 12 months saw not an increase in numbers, but 16.3 million fewer people travelling.

And in 2016 Abellio won the Greater Anglia competition with a promise to pay a whopping £3.7bn to the government over nine years, a figure hugely greater than other bidders offered.

FirstGroup has recently had some unwelcome headlines about its overall financial performance, from its bus division here in the UK to its American operations. It is not the company I would want to see under intense financial pressure for its UK rail operations.

Perhaps in the case of Greater Anglia, the Dutch government, which owns Abellio, will pay up to stay in the game. That of course would rather damage Labour’s mantra about overseas governments creaming off profits from Britain’s railways.

You might argue that if companies overbid for a franchise, then that’s their lookout. After all, if someone buys a shop and then finds they can’t make a profit and have to close, nobody is going to bail them out for their misjudgement.

But of course the railway is not a shop. A shop can close. The railway cannot. And here is the fatal flaw in the franchising model. Whatever happens, the show must go on and if there is no private sector company to run it, then the government must.

It is of course open to the government to enforce the terms of any agreement. Indeed the public might say it was their duty to do so. But pragmatically they take the view that there are few enough companies bidding as it is without frightening the rest off.

So the system limps on. Chris Grayling put it this way when he made his statement to the Commons last week. Stagecoach and Virgin had got their bids wrong, he correctly observed, but then added: “We cannot expect companies to take on unlimited liabilities otherwise they would not bid for franchises.”

But unlimited liabilities is precisely what franchise agreements do entail. And I presume franchise holders can continue to make unlimited profits if this is how a franchise turns out.

A system that encourages unrealistic bids and then lets companies off the hook to the tune of billions when the chickens come home to roost – the public was supposed to receive £3.3bn from the Stagecoach/Virgin operation – is not a sensible approach by any standards.

Over the years we have seen numerous variations. Long franchises, and short ones. Ones where profits and losses are contained by cap and collar. Some where companies walk away early, and are then allowed to carry on bidding for other contracts, and others where almost random extensions to contract lengths are given without any bidding process. And the Holy Grail seems as far away as ever.

Now Chris Grayling wants to try a new approach, based on closer integration between public and private sectors, between the infrastructure operator and the train operating company.Closer integration as a concept is certainly desirable though whether it will lead to a more robust franchising model is anyone’s guess. Personally I doubt it. In time, if the government of the day wants to keep the private sector involved, they may be driven towards the management contract model that presently applies on Southern.

In the meantime, at least the paint producers are smiling.

About the author:

Norman Baker served as transport minister from May 2010 until October 2013. He was Lib Dem MP for Lewes between 1997 and 2015.